As ES Realized Vol Continues Spike, It Is Time For The CME To Hike ES Margins To "Protect Investors"

Tyler Durden's picture

The CME's decision to lower ES margins two days ago may enter trader folklore as the most incompetent decision ever made (and we won't get all tinfoily on them: after all we know the CME doesn't see to manipulate markets with margin moves: they told us so themselves). Which is why in order to keep up with the exchange's primary prerogative of "intense focus on risk management" it is now time to not only undo that decision but to actually hike ES margins. Because as the chart below shows, since the margin cut on May 31, realized vols have surged!

And here is where the CME announced the ES margin cut:

Below we remind readers what the salient points are per the CME when it comes to making margin hike decisions. We have yet to see an explanation for margin drops.

At CME Group, we’re intently focused on risk management. In over a century, we have not experienced a default. In more than a century, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations; nor has there been a failure of a clearing member firm resulting in a loss of customer funds. As part of our overall risk management program, margins are adjusted frequently across all of our products based on market volatility. When daily price moves become more volatile, we typically raise margins to account for the increased risk. Likewise, when daily price moves become less volatile, margins typically go down because the risk of the position also decreases.

Margins are set as part of the neutral risk management services we provide. They aren’t a means to move a market one way or another, or to encourage or discourage participation from one kind of market participant or another. Rather, margin is one of many risk management tools that help us assess overall portfolio risk to protect market participants and the market as a whole.

At CME Group, CME Clearing is responsible for setting margins. In doing so, we consider several factors to compute the gains and losses a portfolio would incur under different market conditions. Then we calculate the worst possible loss a portfolio might reasonably incur in a set time (usually one trading day for futures markets).

In other words: it's time ladies.